What you need to know about cryptocurrency during divorce proceedings (or a divorce settlement)

  1. Introduction

As of 2021, more than 6,000 cryptocurrencies exist. It is estimated that more than 300 million people around the world own cryptocurrencies. We can expect their number to increase as more and more people discover the benefits of cryptocurrencies. 

In recent years , there has been a steady increase in the number of divorces around the world. For example, in Belgium, the divorce rate has reached 70%. This means that about ¾ of the Belgian marriages end in divorce. 

The proliferation of cryptocurrencies and the increase in the global divorce rate has led to new challenges in the field of family law. Cryptocurrencies acquired during a marriage are usually regarded as assets and need, similarly to other matrimonial assets, to be divided between the divorcing spouses.

In this article, we examine some cryptocurrency-related aspects of family law. More particularly, we will discuss how to find out whether a spouse owns cryptocurrencies, how to collect evidence indicating ownership of cryptocurrencies, how to prevent a spouse from disposing of  his/her cryptocurrencies before divorce, how to define the value of cryptocurrencies for divorce purposes , and how to divide cryptocurrencies during divorce proceedings. At the end of this article, we provide concluding remarks.

  1. Finding out whether a spouse owns cryptocurrencies

Anonymity is one of the main features of cryptocurrencies. In this regard, please note that some cryptocurrencies provide more confidentiality to their owners than others. The following cryptocurrencies offer particularly strong privacy protection: Monero, PIVX, Zcash, Dash, Horizon, and Grin.

The creation of cryptocurrency wallets often do not require any personal information. Nevertheless, the identification of crypto owners is not impossible. If a spouse has purchased or sold cryptocurrencies through a cryptocurrency exchange platform, that platform may have information about the bank accounts and the credit cards of the seller and/or the buyer. Upon legal request, the platform may disclose this information to the interested parties. 

In addition to checking whether a spouse has an account with a cryptocurrency exchange platform, it is worth checking whether the spouse has frequently purchased (a lot of) goods through Amazon, eBay, and other e-commerce websites. If so it is worth investigating whether the spouse has actually received the goods. In many cases, spouses aiming to secretly buy cryptocurrencies ask third parties to send them cryptocurrencies to their wallets and, in exchange, those spouses buy goods in the name of such third parties. In this way, they ensure that no official records about the purchase of the cryptocurrencies will exist. 

In case of any suspicions that a spouse owns cryptocurrencies, you can hire a digital forensic expert who will conduct a comprehensive investigation and provide you with an official report which can be presented to the court. If you prove that the other party in the divorce proceedings hid or attempted to hide assets by using cryptocurrencies, the court may take into account the fraud when dividing the assets of the parties. 

  1. How to collect evidence indicating ownership of cryptocurrencies

If you find that the other party owns cryptocurrency, it is of utmost importance to collect the evidence of ownership in a proper manner. The collection of evidence should be done in such a manner as to ensure that it is not modified. Even the smallest modification may be used by the other party to argue that the evidence is not authentic and, therefore, should not be taken into account by the court. For example, if you find that the other party has a crypto wallet, it is better that you do not modify any data on that wallet and do not conduct any transactions by using that wallet. Instead, you may just use the “download” functionality of the wallet to download all transactions completed by using the wallet. The downloaded files will usually be in the form of an Excel spreadsheet and will contain information about the time of the transactions, the amount of the transferred cryptocurrencies, and the ID of the transactions.  

In case you find emails confirming cryptocurrency transactions completed by the other party, you can print the emails and store them electronically. A commonly used trick to add a time stamp to the collected emails is to send them to a Gmail email account. In case the other party disputes the date when you found the emails, you can use the messages forwarded to your Gmail email account as evidence proving your claims. 

A party involved in divorce proceedings who discovers that the other party holds a substantial amount of cryptocurrencies is advised to use the services of a digital expert who will properly collect the evidence. Since such experts often charge USD 200 – USD 300 per hour, their appointment will justify the costs only if the value of the discovered cryptocurrencies will likely exceed the costs. For instance, if the value of the crypto assets is below USD 5,000, you may be better off if you do not hire forensic experts.

  1. How to prevent a spouse from disposing his/her cryptocurrencies before divorce

To ensure that the other party will not dispose his/her cryptocurrencies before the divorce, it is necessary to ask the court to order the other party to transfer them to a trusted third party. If the party owning cryptocurrencies disposes of them without the permission of the other party, the court may compensate the defrauded party by adding an equivalent amount to that party’s share. 

It should be noted that, once a spouse disposes of  his/her cryptocurrencies, it may be difficult to document the exact amount of the proceeds from the sale. For example, if Bitcoins are sold for Monero coins, it may be virtually impossible to identify the Monero digital wallet of the seller. 

  1. How to define the value of cryptocurrencies for divorce purposes

Cryptocurrencies can have high volatility. To illustrate, on the 6th of September 2021, the price of one Bitcoin was USD 44,345. Four days later, the price of the same Bitcoin was USD 37,962.  Therefore, if the value of the cryptocurrencies of a spouse is defined a few weeks before the divorce, it may rise quickly after that and the spouse to which the cryptocurrencies will be allocated will get an unfair advantage. One way to prevent this from happening is simply to define the value at the time of the distribution of the assets. 

As for the process of determining the value of cryptocurrencies, it should be noted that, in most jurisdictions, there is no specific method which the parties can use to find the market price of their cryptocurrencies. The parties must usually agree on a fair valuation and make a decision on how to divide the cryptocurrencies reasonably and fairly. 

Instead of engaging in complex value estimation procedures, the parties can just use Coinmarketcap (coinmarketcap.com), a widely used website providing information about crypto prices. However, the prices shown by Coinmarketcap are based on a large number of cryptocurrency exchanges. Thus, they may be much lower or higher than the actual prices at which you can buy or sell the cryptocurrencies to which the prices relate. Furthermore, Coinmarketcap does not list all 6,000 cryptocurrencies. 

It should be noted that only some cryptocurrencies have trading pairs with fiat currency. The majority of cryptocurrencies have trading pairs with other cryptocurrencies. For example, Litecoin, Ethereum, and Bitcoin are paired with USD. However, Iota, Stellar, Ripple, and Icon are paired to larger coins (e.g., Ethereum or Bitcoin). 

If you are concerned that Coinmarketcap does not adequately reflect cryptocurrency prices, you can hire a cryptocurrency evaluator who will apply various accounting approaches in order to establish the value of the cryptocurrencies concerned. The two main accounting approaches used for such evaluation are (i) market approach and (ii) income approach. The market approach determines the value of an asset on the basis of the selling price of a similar asset. The income approach uses the income generated by an asset to estimate the value of that asset. 

  1. How to divide cryptocurrency during divorce proceedings

Due to the volatile nature of cryptocurrencies, parties are advised to add a clause in their divorce contracts which will state that, if the value of the cryptocurrency concerned increases or decreases by a given percentage, the party who will (get) receive the cryptocurrency will either compensate the other party (in case of an increase) or will be compensated by the other party (in case of a decrease). To avoid any issues pertaining to the fluctuation of the cryptocurrency prices, the parties may agree just to divide their cryptocurrencies equally. In this manner, no party will be at risk of getting less value than the other party. 

  1. Concluding remarks 

This article has shown that divorcing parties need to pay special attention to the “cryptocurrency” aspects of their divorce. First, they need to ensure that all matrimonial cryptocurrency assets are properly disclosed during the divorce proceedings. If a party believes that the other party likely owns undisclosed cryptocurrencies, he or she may hire a digital forensic investigator. Once evidence of ownership of cryptocurrencies is found, the next step will be the preservation of the evidence. The smallest modification of the evidence may lead not only to inadmissibility of the evidence, but also to claims that the party presenting the evidence engaged in forgery.

After collecting proper evidence, you may wish to ask the court to order the owner of the cryptocurrencies to transfer them to a trusted third party. Thus, you will ensure that the cryptocurrencies will not be sold at a time and price unknown to you. 

The identification and preservation of cryptocurrencies are not the only “crypto” challenges in divorce proceedings. The evaluation of cryptocurrencies is also a difficult part that requires a lot of attention. Although the divorcing party can easily define the value of their cryptocurrencies by using Coinmarketcap or a similar website, in some cases, it may be better to hire an accountant specialized in the valuation of cryptocurrencies.  

Parties willing to divide their cryptocurrencies in a fair manner may include special clauses in their divorce contracts that will ensure that no party will get more value than the other party. Furthermore, they may divide their crypto assets equally, without selling them. This will make sure that each party will receive the same monetary value.

References

https://statbel.fgov.be/en/themes/population/partnership/divorces 

https://cryptforensic.com/2019/01/10/guide-to-determining-fair-market-value-fmv-for-cryptocurrency-assets/

https://www.investopedia.com/terms/m/market-approach.asp 

https://www.investopedia.com/terms/c/cost-approach.asp 

https://www.cnbc.com/2021/05/28/dividing-cryptocurrency-in-a-divorce-settlement-is-complicated.html 

https://www.cnbc.com/2021/06/01/divorcing-spouses-are-using-cryptocurrency-to-hide-money-how-experts-find-it.html

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